Question

Suppose all firms in a monopolistically competitive industry were merged into one large firm. Would that new firm produce as many different brands? Would it produce only a single brand? Explain.

Short answer

If all firms in a monopolistically competitive industry were merged into one large firm, i.e., a monopoly, it's plausible but not inevitable that the firm would reduce the number of brands. It could theoretically produce a single brand, since monopolies don't have direct competition driving brand differentiation. However, depending on consumer preferences, maintaining a variety of brands may still be advantageous for the firm.

Step-by-step solution

Understand Monopolistic Competition

In monopolistic competition, each company sells different yet somewhat substitutable goods. It can influence the market price somewhat by its individual actions. So it competes with other companies with similar products. Hence, there is a significant amount of brands when multiple firms each have their differentiations.

Hypothesize the Result of Merger on Brand Diversity

If these firms were all merged into one giant firm, it would become a monopoly. By definition, a monopoly is a firm that is the only seller of a good or service without any close substitutes. The monopoly is a price-maker that can decide the price of its products.

Consider the Impact on Brands

A monopoly does not need to maintain a variety of brands since it has no direct competition, it could theoretically eliminate all brands and produce only one. However, maintaining a variety of brands might still be beneficial for the monopoly firm as it might appeal to different consumer preferences and potentially maximize total revenue.